US Inflation To 2.1% - But No, This Isn't The Inflation The Federal Reserve Is Looking For

The Labor Department has just released the latest consumer inflation numbers for the U.S. and one of those measures is at 2.1%. So, obviously, given that the Federal Reserve targets a 2% inflation rate, we've got more than 2%, then we're absolutely certain that the Fed will raise rates next month, right?

Well, no. We're pretty sure, from other things that have been said, that the Fed is going to raise rates next month. But it won't be because of today's inflation numbers. Because this is a different inflation index, a different type of inflation, than the one the Fed is interested in.

U.S. consumer prices recorded their biggest increase in six months in October on rising gasoline costs and rents, suggesting a pickup in inflation that potentially clears the way for the Federal Reserve to raise interest rates in December.

Yesterday we got the producer price numbers, today the consumer. As you might imagine there are a number of different ways we can measure inflation and there are indeed a number of different ways that we do measure inflation:

The consumer-price index climbed 0.4 percent in October from the previous month after a 0.3 percent gain in September, Labor Department figures showed Thursday in Washington. That matched the median forecast in a Bloomberg survey of economists. Excluding volatile food and fuel, the so-called core measure rose 0.1 percent, just below the estimate of 0.2 percent.

One of those different ways is that we can just look at all goods. And that's that first set there. But we also know that certain goods are very much more volatile in prices than some others. Food and fuels for example. They can bounce around and obviously they're part of the overall inflation. But what we're really interested in about inflation is not that relative prices are changing, but whether there is general inflation--are the prices of everything going up? At which point we use the "core" measure which strips out those volatile elements.

But this core number, which is now 2.1%, still doesn't give us the number the Fed watches:

The target hasn’t been achieved for more than four years, as measured by the Fed’s preferred inflation gauge, the Commerce Department’s personal-consumption expenditures price index. That reading rose 1.2% from a year earlier in September, the strongest increase since November 2014. The Commerce Department will release its October inflation measure at the end of this month.

And it's Core PCE the Fed watches, not the more general number.

We're pretty sure, barring some massive surprise, that the Fed will raise interest rates next month. But it won't be because of the rise in this specific inflation index to over 2%.